Buying your dream home is something I’ve been thinking about for years. Let’s discuss the process of buying a dream home and how we can get there.
Every time I go to Honolulu, I spend a Sunday afternoon looking at dream homes. As I get older and think about family, I day dream of having a large flat lot so my kid(s) can run around and play in the grass.
I dream about being walking distance from the beach so we can play in the sand and go snorkeling when he’s big enough to swim. After the beach, I imagine showering off outside and relaxing on my lanai in 76 degree weather while the palm trees rustle in the background.
I’m always dreaming because it’s free, fun, and motivating. When I was a kid, I dreamed of getting a Nintendo, but never did. As a result, I just befriended someone who had one and went over to his house to play.
When I was getting whipped at work as a recent college grad, I dreamed of breaking free by 40. As a result, I saved everything I had to build passive income in order to have options.
The Desire For The Dream Home Emerges
After retiring from the corporate world, you really don’t need much to survive. Once you’ve got the $20,000+ a year in private school tuition budgeted for the next 17 years (!), the next great expense is a sweet pad, if that’s what you want.
I’m obsessed with real estate because it can be enjoyed and it can create wealth at the same time. I don’t crave living in a huge house due to the property taxes and upkeep. It’s why I downsized to a modest ~1,910 square foot home back in 2014.
But every time I visit one, my desire for a mega mansion goes up! Here’s a fun post about my dream of buying a sweet home by the beach one day.
The Dream Home Target
We’ve been through my thought process about buying a dream home with my parents before. It looks like this plan isn’t going to fly because my parents are happy with things just the way they are.
Even though their house hasn’t been remodeled since it was first built in the 1980s, they’re content. They’ve added AC and changed all the windows and sliding doors. All they really need to do is swap out the old kitchen appliances, paint the walls, and maybe get some new carpeting.
So now that my parents and their balance sheets are out, I’ve got to figure out a plan to come up with all the finances myself. The best way to do so is to first decide what type of house I’d love to live in and how much it would actually costs.
The below is a video of a brand new, 5 bedroom, 5.5 bathroom, 6,066 square foot home on a 10,257 foot lot one block from my favorite secluded beach. It’s essentially the perfect house for a not so perfect price of $4,950,000!
I gotta do a lot more blogging to come up with this type of cash. Have a look and let me know what you guys think.
Dream Home Details
OK, I’m going to guess that 92% of you think this is one sweet house. 8% of you are just nutso with standards so high you’ll never be happy! I think this house would be perfect for up to six people. The combinations I imagine are:
* A family of four plus mom and dad
* A family of three plus mom and dad
* A family of three plus mom and dad plus a housekeeper
* A family of three plus a housekeeper
* A family of three
* A family of four
* A family of five
Anything less than three people would make this house feel too lonely and wasteful. Any more than six and it’ll feel too crowded.
Action Plan To Achieve My Dream Home
To buy a $5,000,000 property I’ve got to either come up with $5,000,000 in cash or come up with $3,000,000 or more and take on a $2,000,000 mortgage or less.
A property like this Hawaiian house in a similar quality area in San Francisco would cost over $12,000,000 based on a conservative price of $2,000/square foot.
The reality is, such a property is unobtainable in San Francisco for less than $15,000,000 due to it’s 10,250 square foot lot. 6,000 square foot+ sized houses in San Francisco go for $15,000,000 and are on only ~5,000 square foot lots.
In other words, this Hawaiian home is relatively good value!
Here’s a 6 bedroom, 5.5 bathroom house, 5,455 sq ft on a tiny 3,500 sq ft lot that just sold for $19,466,666! WHAT? Are you kidding me? That is absolutely ridiculous!
The easier way to buy this house is to come up with a $3,000,000 downpayment and get a $2 million mortgage for ~$10,000 a month at today’s rate. To be able to qualify for a $10,000 a month mortgage payment, the bank will probably require the borrower to make at least $25,000 a month, or $300,000+ in gross income a year for the past two years.
The only way for me to legally come up with a $3,000,000 downpayment is to simplify life and sell my two self-managed San Francisco rentals.
Rental #1:
Zillow value: $3,300,000. Realistic value: $2,500,000. Mortgage left: $800,0000. Net proceeds after 5% commission and transfer tax: $1,560,000. Gross rental income lost: $9,000 a month. Net rental income lost: $5,559.
Rental #2:
Zillow value: $1,200,000. Realistic value: $1,050,000. Mortgage left: $0. Net proceeds after 5% commission and transfer tax: $986,500. Gross rental income lost: $4,300 a month. Net rental income lost: $2,940.
Total money raised: $1,560,000 + $986,500 = $2,546,500
Total gross passive income lost: $13,300 a month
Downpayment Deficit: $3,000,000 – $2,546,500 = $453,500
Damn! Not enough money!
Next Steps Of Action To Land My Dream Home
I could sell my Lake Tahoe vacation property, but I don’t think I’ll get more than $100,000 net from the place since it hasn’t recovered back to my original purchase price. I’ve got a property management company who handles everything, so the property doesn’t take any time away from my life at all.
I could sell my Golden Gate Heights primary residence to extract about $800,000, but I think Golden Gate Heights has the most upside in San Francisco due to its quiet neighborhood, vicinity to good schools, predominance of single family homes, incredible panoramic ocean views, and relatively good pricing of homes below $2,000,000.
Besides, I’d love to have a place in San Francisco whenever I come back and visit. There’s nothing like living in your own familiar home compared to a random rental or hotel room. Also, I’m afraid that if I sell all my San Francisco properties, I’ll never be able to get back in due to continued price inflation.
Losing $8,499 in net rental income a month and paying 5% selling commissions plus transfer taxes and fees seems like a bad idea. The original plan was to keep the rental properties to pay for my retirement. However, the older I get, the more I don’t want to manage my rentals. I’m strongly considering hiring a property manager as an alternative to selling as well.
Fortunately, after almost 8 years of blogging, I don’t need to depend on my rental income for retirement survival anymore. It’s just a little riskier to rely on my online income because it’s less stable than rental income.
To come up with the $453,200 downpayment deficit, I’ll just need to work harder for the next couple of years. I don’t want to sell down other asset classes because I want to retain a proper net worth allocation mix.
The positives of selling the two main rentals and buying this dream home:
* $30,000 less in SF property taxes a year, but it will just turn into $30,000 in Honolulu property taxes
* No more tenant hassles
* Taking profit in an expensive market and reallocating proceeds to a less expensive market that’s weak in the $2,000,000+ range
* The ability to do a tax-free 1031 exchange
* Unlocking sunk capital for a better lifestyle instead of more income
Don’t Wait Until You’re Too Old
Ideally, I’d like to keep all my rentals and buy this type of dream property. But that’s not possible with my currently liquidity. Based on my current rate of savings, it would take me about 10 years to come up with the downpayment.
That means I’ll have just turned 50, and who knows whether I’ll be alive by then. Further, the $5,000,000 price tag might appreciate to $6,000,000 by then using a modest 1.8% annual growth rate.
The older I get, the more I want to live it up before I die. I’ve seen too many people work so hard and die with way too much left over. The one material thing I appreciate more than anything else is living in a nice home.
Last year, I learned from a Honolulu realtor hosting an open house that the seller was 80 years old and had finally bought an ocean front property he’d been wanting for years. The same realtor told me this year that the 80 year old man had a heart attack and is in and out of the hospital. Things don’t look good.
I don’t want to wait until I’m 80 to live the dream.
For those of you who can afford to own a beach front property, here’s one for you that’s currently asking $22,800,000. It’s got seven bedrooms, 10 bathrooms, 8,500 square feet of living space, 0.85 acres, with just killer, killer views!
Let’s see, to afford $22,800,000 after tax, I would need to sell Financial Samurai for about $50,000,000 to receive about $30,000,000 net. I’d have $7,500,000 million left to pay the $250,000 a year in property taxes and $120,000 a year in maintenance costs. It can be done! Always good to dream right?!
Bought My Dream Home!
A funny thing has happened. I finally bought my dream home in 2020, a month after lockdowns went into place. Inexplicably, the seller listed their home when open houses shut down completely. Because of this, there were only private showings.
The house was amazing, with panoramic ocean views on three levels and much larger space. I pounced on the opportunity after I had gotten preapproved for a mortgage earlier. The preapproval process really is key if you want to be a competitive buyer and taken seriously.
Even though things were kind of nerve-wracking in April 2020, I thought things would get better. As a result, I bought the home for about $200,000 under asking!
I’m bullish on big city real estate and rental properties in 2022 and beyond. The intrinsic value of real estate has gone way up because we are spending so much more time at home. Meanwhile, rental income has gone way up because interest rates have come way down.
Recommendations
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Updated for 2020 and beyond.
That particular house did not have enough outdoor living space. If you’re going to go to Hawaii where the weather is awesome all year round, you need to be spending a majority of your time going outside even in your house. You need a house with a courtyard type area where you are forced to walk outside to go from say your bedroom to kitchen. This I would say is a better listing for $2mm more.
Could you elaborate a little more how you arrived at your dream to live on Hawaii and in particular on Oahu? Big Island seems acreage wise much cheaper but admittedly has less infrastructure. What are other reasons besides the beyond words beauty of the islands to move to Hawaii?
Also, given the premium one always pays for a newly remodeled home why are you not considering a somewhat older but still great home that is far above Bayarea standards?
Lastly, you wouldn’t really pay sticker price given the negotiations you have historically done when acquiring or selling real estate. Why are you assuming sticker price for your calculations?
In Port Royal, FL the home values r get between $15m to $70 million. If you want to purchase a home there, you are required by the association to have a minimum net worth of 10 times the value of the property. Once you reach a certain level of wealth, I think that is a pretty good rule of thumb to live by. If you want to own a $5 million house a lot goes in to support it and you will need to have the resources to do so.
I love the 10X minimum net worth rule! Let me think it over and maybe write about it! Maintenance/upkeep costs truly are expensive. My friend owns a $15M napa property estate and pays a guy $100,000 a year to maintain, and gives him a free house to stay in.
Though I am far, far, far! below those levels my net worth is right on 10x the value of my primary home. I do feel that if I want to upgrade my home, I have to increase my net worth first.
I’m far, far, below 10X net worth based on my primary home value as well. Good goal to have, which I think I can achieve in 20 years. But not now!
Oddly enough, I’m basically living my dream.
The only thing I would like to do is design my own home with all the random elements I want, like urinals in every bathroom, and maybe a fireman’s pole. It wouldn’t really be any bigger than what I have, just customized for me and my family.
My ridiculous dream is to buy a 3 bedroom 3 bathroom condo in my high COL area that prioritizes 1 bedroom condos. The two extra bedrooms would be available for me to take in friends and folks fleeing DV as needed. I was so sad to hear how an old friend’s marriage is going when I saw her over the holiday. I wish I had a tangible way to help her.
A big reason why I’m focusing on building business is being able to buy a sick home when I am older. As a software engineer even if I saved and invested well it would still take a long time to afford a 5m house (without getting lucky from options of a successful startup). That home looks amazing.
The $5 million dollar home looks AMAZING. My only problem is how close you are to the neighbors, but I can overlook that with how close you are to the ocean. My husband dreams of living in the Dominican Republic. We also looked at dream homes that and what it would take to buy those homes.
The neighbors are close, but what I noticed is that it’s total privacy because all around are high walls and tall foliage. Further, the neighbors are all single story, whereas this house is double story.
How much are homes in the DR?
Hi Sam,
Wow these properties are sick! I guess when I retire I’d like to go much smaller in square foot, but either by some type of waterfront OR in the city where shops and restaurants are below. But i don’t want to take on any new loans, just the proceeds from selling my house and pay for a small flat with cash.
The location of those houses is VERY tempting to me, but not the size of the houses themselves. We have a small house on a quarter acre lot on the Peninsula and it is definitely sweet to have the extra space around your house to buffer from the neighbors. Unfortunately it looks like my dream landscaping will cost almost $200K! I’m not sure whether to procrastinate on this or just bite the bullet.
Living close to family is really something special. We are so lucky that both of our families are from the Bay Area. :]
My big dreams are:
– 1 to 2 kids (one on the way!), probably private school + other related spending
– Beautiful but manageable home
– Financial Independence by the time my husband and I are an average age of 40 (by 2027).
– Lots of traveling, for months at a time instead of just a couple weeks at a time.
It’s going to happen!
What’s the point of doing all of this, amassing wealth, and striving for a kick ass retirement if you can’t enjoy it? Couldn’t agree with your idea more. There is a balance between living in the moment now and being reckless with finances. And all of us track and are too passionate about PF to not care about finding the sweet spot. Dreaming is important because dreaming gives you something to strive for. I don’t own any rental properties, so this may be an unsolicited opinion, but I can’t imagine dealing with tenants as being very much fun. Of course I am a perfect tenant (**self proclaimed**) but I cannot imagine how some of these people treat places when they don’t have any financial liability on the line.
Last words. If you want Hawaii and you want to enjoy it before 80. MAKE IT HAPPEN! YOU’VE GOT THIS!!!!!
Thanks for the read and causing me to spend the next few hours on my Zillow app.
Bert
Howdy Bert,
Thanks for stopping by FS, and also sharing your goals. I tried to leave this comment on your site, but it wouldn’t allow for some reason. Says I’m spam! haha.
I like that $45,000 contribution goal! Good stuff my man. I’m sure you will find a way to get there, b/c when you have a goal, it’s much easier to find ways to achieve it.
Your dividend income portfolio is gaining momentum. Niiiice.
As for Hawaii, I go there so often, I do wonder whether I can just rotate cities instead of just go there full time. But that’s fear of change talking. Also, it’s not feasible if my child is in school. We shall see!
Sam
Hey Sam,
Do you use a property management company for your two rentals? Do you have any posts on the analysis of this subject?
Also, do you have any posts on your experience with the property management company for the Lake Tahoe property? This would be an interesting topic for me to learn about.
Erik
Hi, Sam!
My crazy dream is to become a bestselling fiction author. I’m going to do it in approximately four years when Mr. Free and I become financially independent. I’m just crazy enough to believe my crazy dream will come true.
I’m enjoying the journey along the way, finishing the third novel in my trilogy on lazy Saturday mornings in local coffee shops. I work in a demanding corporate job, and found that trying to be a wife, mom, rock star sales rep, community activist, AND a published author were more than I could handle and stay healthy. That realization was startling, but was the catalyst to my defining our financial independence goal after over a decade of preparing for … for something, but I didn’t know exactly what.
Your famous article on net worth inspired me, and I want to thank you. I stumbled across it shortly after I decided to pull my first book from publishing. I was so tired the night before from responding to book bloggers and ironing out last minute details that I’d wrecked my car. I wasn’t ready to quit my day job yet, but I knew the day would come. I decided to keep writing (so in essence, I’m doing what I love), but put off publishing until I had no worries about keeping my day job.
When I saw that Mr. Free and I fell into your definition of above-average net worth as a couple, a fire stirred inside me to get serious about defining my goal.
Happy holidays, and thank you again.
Mrs. Free
P.S. Hawaii is breathtaking! I can’t wait to go back!
Wonderful dream! Thanks for sharing.
I can’t imagine doing it all as a husband, dad, corporate working, activist, and publisher. No way. Hats off to you and the other women who are juggling so much in their lives!
Ah, it’s so good to dream.